Prada (1913)

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Jun 7, 2011
Prada seeks to raise $3.2b from HK listing

HONG KONG: Italian fashion house Prada is seeking to raise US$2.6 billion (S$3.2 billion) from its initial public offering (IPO) in Hong Kong, giving the maker of luxury bags and Miu Miu dresses a value higher than its European peers.

Prada set an indicative price range of HK$36.50 (S$5.80) to HK$48 a share for the IPO as it started meetings with Asian investors to gauge appetite for the deal, a source with direct knowledge of the plans yesterday told Reuters.

The IPO - designed to cut Prada's debt of about €1billion (S$1.8billion) and fund further expansion in Asia - is being priced at 27 times projected 2011 earnings, at the top end of the range, the source said, higher than the average of European top luxury groups such as Tod's, Burberry and LVMH.

In Singapore, about 60 investors and fund managers attended a lunch-time presentation by Prada chief executive Patrizio Bertelli. Some expressed concerns about the pricing.

'There's no reason for it to trade higher than LVMH, which has a more diversified portfolio. Prada may be banking on the China story, but all the other luxury brands are also going into China and it's going to be very competitive and tough there,' said one manager of a Singapore-based fund, who declined to be identified.

However, Prada may take heart from upscale clothing maker Moncler's decision, announced yesterday, to drop plans for its own IPO in Milan after it sold a stake to investment firm Eurazeo.

Some investors had said competition from a Moncler flotation, together with the upcoming listing of luxury shoemaker Ferragamo, could have dented investor appetite for Prada's offering.

'Prada is a known name to Asian investors. I think the appetite for this IPO really depends on where the price will be within that range,' said Julius Baer Luxury Brands Fund portfolio manager Scilla Huang Sun. 'This will also depend on market sentiment in the coming days, given that markets are a bit volatile now.'

Prada, 95per cent owned by the families of Mr Bertelli and his fashion designer wife, Miuccia Prada, is betting on a boom in the consumption of luxury items in China, the world's second-largest economy, to lure investors to the IPO.

China will account for 20per cent of the global luxury market by 2015, consulting firm McKinsey & Co says.

The IPO is slated to be priced on June17 and the shares will start trading in Hong Kong on June24 under the symbol '1913', the year the company was founded in Milan.

Prada, which repeatedly scrapped plans for an IPO over the past decade, is the first Italian company to float in Hong Kong - underscoring the weight of the Asian market, which accounted for 40per cent of Prada's €2billion sales last year.

My Value Investing Blog:
Frankly I am interested in this counter.
But doubt will be fascinated by its IPO pricing this coming friday.

Enjoy the articles.

Prada’s towering p/e sees managers wobble
By Peter Shadbolt

Published: June 12 2011 07:16 | Last updated: June 12 2011 07:16

A glitzy roadshow last week in Hong Kong ahead of Prada’s planned HK$20.31bn ($2.63bn) initial public offering this month failed to impress fund managers, who blanched at a price-earnings ratio of as much as 27 times valuation.

Despite a 25-minute fashion show presided over by group president Miuccia Prada, a pre-show cocktail party and a management presentation led by her husband Patrizio Bertelli, fund managers collectively choked on their canapes at a valuation that puts the brand at least 20 per cent ahead of its nearest rival Burberry.

Fund managers in particular commented on the fact that Prada comes in at 18 times the p/e of LVMH, the world’s largest luxury brand, and that it was competing in an increasingly crowded market.

Christfund Securities research director Simon Lam Ka-hang said the China luxury consumption story might not be enough to overcome the eye-watering valuation.

“The historical price-earnings ratio is even higher than existing blue chips,” he told local media. “There is no clear future dividend policy.”

However, Peter Elston, a strategist at Aberdeen Asset Management, says companies like Prada have a natural advantage in that a luxury brand cannot be built up overnight, making for a high barrier to entry.

“There is a feeling among fund managers that 27 or 28 times valuation is probably a bit too much, but I think there is quite a bit of interest being generated and they will get away with it – with or without us,” says Mr Elston. “Whilst there are many out there, like us, who are not prepared to pay out this much, I suspect there are enough who are.”

He says the launch on June 24 – the first Italian firm and the first luxury western brand to list in Hong Kong – is a large but safe bet on the future of luxury goods sales in China and that top-line growth for companies like Prada is likely to be strong for the next 20 years.

“It may well be the sort of stock that may hit 35 or 40 times,” Mr Elston says. He points out that the p/e of French skincare company L’Occitane “has expanded quite dramatically” since its IPO last year.

“You might well see the same sort of thing happen here but it’s not the sort of game we’re prepared to play,” he says. “You are relying upon multiple expansion, which is always hard to rely on.”

L’Occitane tumbled on its debut in Hong Kong in May 2010, in the first sign of trouble for luxury brands targeting China. Nevertheless, Mr Elston says the value inherent in the Prada brand may be enough to carry the day.

“The value can generate very good returns on capital, which does justify an above-market valuation. But an above market valuation would be 20 times not 27 times,” he adds.

Prada plans to open at least 30 new stores on mainland China by January 31 2014, almost doubling its current base of 18 stores. The Miu Miu line of handbags and women’s wear has proved popular in China, and planned expansion in this line will see the company expand the number of stores selling the merchandise from the current 30 to 55 by 2014.

The growing spending power of the Chinese middle class and general economic strength in Asia helped Prada more than double net profits to €250.8m ($363m) in the year to January 2011 from €100.2m in 2010.

The group forecasts net profit will be at least €150.7m in the first six months to July. With the indicative offering price of its debut ranging between HK$36.50 and HK$48 per share, the offer comes in at 27 times its p/e ratio. The IPO will offer 423.3m shares.

China is second to Japan as the world’s largest market for luxury goods, overtaking the US in 2009.

China’s luxury goods market – which already accounts for 27.5 per cent of the world’s total market and is worth an estimated $9.4bn – will grow to $14.6bn by 2014, surpassing Japan to become the world’s largest, according to a report from the Chinese Academy of Social Sciences.

Copyright The Financial Times Limited 2011.
Prada: overhyped China story
Published: June 15 2011 12:09 | Last updated: June 15 2011 12:09

Prada has packaged its initial public offering in a typically artful way. The Milan-based fashion house has chosen to list in Hong Kong, it says, largely because of its proximity to China, the world’s fastest-growing luxury goods market. But Prada has just 14 stores across the entire mainland, fewer than in Tokyo. Its aggressive expansion plan (the primary justification for selling shares) is to fill holes in its global network rather than in China — it has no stores in Stockholm, Barcelona or Brussels, or anywhere in Russia or Brazil. An outlet on every Chinese corner, after all, makes little sense. High taxes mean that a large portion of luxury items is bought offshore.

If executives were entirely honest, they would admit that the IPO is where it is because that is where valuations for trophy assets are highest. Christie’s, the auctioneer, broke 36 world records at its Hong Kong Spring sales, concluded earlier this month; 10 Pollock’s Path, an 8,302 sq ft property on The Peak, sold last week for a record HK$800m (US$103m). If Prada prices on Friday at the midpoint of its indicative range, the equity would be valued at 24 times this year’s earnings, significantly ahead of a clutch-bag of rivals in Paris, London and Milan.

Prada is truly a “trophy asset.” Unlike most of its European competitors, the company has an undiluted exposure to the top end of luxury. It will also be the only Italian stock, and the only luxury stock of size, listed in Hong Kong. That institutions have subscribed for five times the shares available suggests they are ignoring the network expansion, which can only weaken margins. They are essentially showing the same lust for shiny baubles as the taitais queueing outside Prada’s flagship Hong Kong store on Canton Road. You’ve bought the handbag; now buy the share.

Copyright The Financial Times Limited 2011.


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